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IFRS 7 Financial Instruments: Disclosures Image for illustrative purposes only. To replace the right click on the image and go to “change image”. 1 © 2016 Deloitte Touche Tohmatsu Limited IFRS 7 IFRSIFRS 7 Backbone 7 Classes of Classes of Financial financial Instruments instruments and Level level of and of disclosures Disclosures Statement of financial Balance Sheet position Categories of financial assets and financial liabilities Financial assets and liabilities at fair value through profit or loss Reclassification Derecognition Transfer of financial assets Offsetting Collateral Allowance account for credit losses Compound financial instruments with multiple embedded derivatives 2 Nature and extent Nature extent risks arising arising from ofofrisks from financial instruments instruments financial Significance of financial instruments Significance of financial instruments and level of disclosure Defaults and breaches Statement of profit or Income statement and loss and other equity comprehensive income Items of income, expense, gains and losses Other Other disclosures disclosures Accounting policies Hedge accounting Fair value (detailed Fair value disclosures in IFRS 13) Qualitative disclosures Qualitative disclosures Quantitative Quantitative disclosures disclosures Credit risk Exposures to risk Objectives, policies and processes Liquidity risk Market risk Scope All financial instruments Except Interests in subsidiaries not accounted for using FV election Interests in associates not accounted for using FV election Interests in joint arrangements not accounted for using FV election Employee benefit plan’s rights and obligations under IAS 19 Insurance contracts under IFRS 4 IFRS 2 arrangements Instruments classified as equity instruments in the financial statements of the issuer © 2014 Deloitte Touche Tohmatsu Limited 3 IFRS 7 Categories disclosure IFRSIFRS 7 Backbone 7 Classes of Classes of Financial financial Instruments instruments and Level level of and of disclosures Disclosures Nature and extent Nature extent risks arising arising from ofofrisks from financial instruments instruments financial Significance of financial instruments Significance of financial instruments and level of disclosure Statement of financial Balance Sheet position Categories of financial assets and financial liabilities Financial assets and liabilities at fair value through profit or loss Reclassification Derecognition Transfer of financial assets Statement of profit or Income statement and loss and other equity comprehensive income Items of income, expense, gains and losses Other Other disclosures disclosures Accounting policies Hedge accounting Fair value (detailed Fair value disclosures in IFRS 13) Qualitative disclosures Qualitative disclosures Quantitative Quantitative disclosures disclosures Credit risk Exposures to risk Objectives, policies and processes Liquidity risk Market risk Offsetting Collateral Allowance account for credit losses Compound financial instruments with multiple embedded derivatives 4 Defaults and breaches © 2014 Deloitte Touche Tohmatsu Limited IFRS 7 Categories disclosure Categories of financial assets and financial liabilities The carrying amounts of each of the following categories shall be disclosed either on the face of the balance sheet or in the notes: (a) financial assets at fair value through profit or loss, showing separately: (i) those designated as such upon initial recognition and (ii) those classified as held for trading in accordance with IAS 39; (b) held-to-maturity investments; (c) loans and receivables; (d) available-for-sale financial assets; (e) financial liabilities at fair value through profit or loss, showing separately (i) those designated as such upon initial recognition and (ii) those classified as held for trading in accordance with IAS 39; and (f) financial liabilities measured at amortised cost. © 2016 Deloitte Touche Tohmatsu Limited 5 IFRS 7 Categories disclosure Financial Assets For reconciling purposes At Fair value through profit or loss Designated Held for trading Loans & receivables Held to maturity Available for sale Non-financial instruments Total Assets Non-current Assets Asset A Asset B X X X X X X X X X X X X XX XX Current Assets Asset D Asset E X X X X X X X X X X X X XX XX X X X X X X XX Agree to face of statement of financial position © 2016 Deloitte Touche Tohmatsu Limited 6 IFRS 7 Categories disclosure For reconciling purposes Financial Liabilities Designated at FVTPL Held for trading Financial liabilities at amortised cost Non-financial instruments Total Liabilities Non-current Liabilities Liability A Liability B X X X X X X X X XX XX Current Liabilities Liability D Liability E X X X X X X X X XX XX X X X XX X Agree to face of statement of financial position © 2016 Deloitte Touche Tohmatsu Limited 7 IFRS 7 Designated at FVTPL IFRSIFRS 7 Backbone 7 Classes of Classes Financial financial Instruments and instruments Level ofof and level Disclosures disclosures Nature Nature and and extent extent ofofrisks from risks arising arising from financial instruments instruments financial Significance of financial instruments Significance of financial instruments and level of disclosure Statement of Balance Sheet financial position Categories of financial assets and financial liabilities Financial assets and liabilities at fair value through profit or loss Reclassification Derecognition Transfer of financial assets Statement of profit or Income statement and loss and other equity comprehensive income Items of income, expense, gains and losses Other Other disclosures disclosures Accounting policies Hedge accounting Fair value (detailed Fair value disclosures in IFRS 13) Qualitative disclosures Quantitative Quantitative disclosures disclosures Credit risk Exposures to risk Objectives, policies and processes Liquidity risk Market risk Offsetting Collateral Allowance account for credit losses Compound financial instruments with multiple embedded derivatives 8 Defaults and breaches © 2014 Deloitte Touche Tohmatsu Limited IFRS 7 Financial assets and liabilities at FVTPL If the entity has designated a financial asset as at fair value through profit or loss, it shall disclose: (a) the maximum exposure to credit risk at the reporting date (b) the amount by which any related credit derivatives or similar instruments mitigate that maximum exposure to credit risk. (c) the amount of change that is attributable to changes in the credit risk of the financial asset determined either: (i) as the amount of change in its fair value that is not attributable to changes in market conditions that give rise to market risk; or (ii) using an alternative method (d) the amount of the change in the fair value of any related credit derivatives or similar instruments that has occurred during the period and cumulatively since the loan or receivable was designated. © 2016 Deloitte Touche Tohmatsu Limited 9 IFRS 7 Financial assets and liabilities at FVTPL If the entity has designated a financial liability as at fair value through profit or loss, it shall disclose: (a) the amount of change that is attributable to changes in the credit risk of that liability determined either: (i) as the amount of change in its fair value that is not attributable to changes in market conditions that give rise to market risk (ii) using an alternative method (b) the difference between the financial liability’s carrying amount and the amount the entity would be contractually required to pay at maturity © 2016 Deloitte Touche Tohmatsu Limited 10 IFRS 7 Financial assets and liabilities at FVTPL Changes in fair value attributable to changes in credit risk Calculate the fair value that is due to changes in credit risk of T1 The following assumptions must be made: • Company A issues a 5 year bond at T0 • The bond trades on a recognised stock exchange • The bond is designated as at FVTPL on initial recognition Details of the bond are as follows: Maturity date Year 5 Nominal value CU 500 Coupon 9 % annual Issue price CU 450 Market value at T1 CU 400 5 year risk free rate @ T0 10.5% 4 year risk free rate @ T1 12.75% © 2016 Deloitte Touche Tohmatsu Limited 11 Financial assets and liabilities at FVTPL Changes in fair value attributable to changes in credit risk Solution: Step 1: Calculate the IRR Cash flows are as follows: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 -450 45 45 45 45 545 Coupon interest payments over the period of the bond Initial investment at T=0 IRR = 11.76% Redemption of the bond at T=5 (face value + coupon) © 2016 Deloitte Touche Tohmatsu Limited 12 Financial assets and liabilities at FVTPL Changes in fair value attributable to changes in credit risk Solution (continued): Step 2: Calculate the instrument specific component of the IRR Maturity date Year 5 Nominal value CU 500 Coupon 9 % annual Issue price CU 450 Market value at T1 CU 400 5 year risk free rate @ T0 10.5% 4 year risk free rate @ T1 12.75% IRR 11.76% Observed benchmark interest rate 10.5% Instrument specific component of IRR 1.26% © 2016 Deloitte Touche Tohmatsu Limited 13 Financial assets and liabilities at FVTPL Changes in fair value attributable to changes in credit risk Solution (continued): Step 3: Calculate the present value of the remaining cash flows Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 -450 45 45 45 45 545 Remaining cash flows • Discount rate = Benchmark interest rate @ year 1 + Instrument specific component of IRR = 14.01% (12.75% + 1.26%) • PV = CU 427 © 2016 Deloitte Touche Tohmatsu Limited 14 Financial assets and liabilities at FVTPL Changes in fair value attributable to changes in credit risk Solution (continued): Step 4: Compute fair value due to changes in credit risk Present value of cash flows CU 427 Fair value @ Year 1 CU 400 FV due to changes in credit risk CU 27 © 2016 Deloitte Touche Tohmatsu Limited 15 IFRS 7 Derecognition IFRSIFRS 7 Backbone 7 Classes of Classes Financial financial Instruments and instruments Level ofof and level Disclosures disclosures Nature Nature and and extent extent ofofrisks from risks arising arising from financial instruments instruments financial Significance of financial instruments Significance of financial instruments and level of disclosure Statement of Balance Sheet financial position Categories of financial assets and financial liabilities Financial assets and liabilities at fair value through profit or loss Reclassification Derecognition Transfer of financial assets Statement of profit or Income statement and loss and other equity comprehensive income Items of income, expense, gains and losses Other Other disclosures disclosures Accounting policies Hedge accounting Fair value (detailed Fair value disclosures in IFRS 13) Qualitative disclosures Quantitative Quantitative disclosures disclosures Credit risk Exposures to risk Objectives, policies and processes Liquidity risk Market risk Offsetting Collateral Allowance account for credit losses Compound financial instruments with multiple embedded derivatives 16 Defaults and breaches © 2014 Deloitte Touche Tohmatsu Limited IFRS 7 Derecognition On-balance sheet disclosures Off-balance sheet disclosures • Financial assets transferred & not derecognised • Nature of & risks from continuing involvement (all new) • CA & FV & maximum exposure to loss of continuing involvement • Cash outflows to repurchase assets & maturity analysis of future cash outflows • Gain/loss on date of derecognition • Income/expense recognised from continued involvement • Disclosures if transfer activity not evenly distributed • Terms of derecognised transaction • Certain disclosures already required by IFRS 7 • Description of nature of relationship between transferred financial asset & associated liabilities (incl. use restricted) • If recourse only: FV of asset, associated liabilities and net position © 2016 Deloitte Touche Tohmatsu Limited 17 IFRS 7 Reclassification IFRSIFRS 7 Backbone 7 Classes of Classes Financial financial Instruments and instruments Level ofof and level Disclosures disclosures Nature Nature and and extent extent ofofrisks from risks arising arising from financial instruments instruments financial Significance of financial instruments Significance of financial instruments and level of disclosure Statement of Balance Sheet financial position Categories of financial assets and financial liabilities Financial assets and liabilities at fair value through profit or loss Reclassification Derecognition Transfer of financial assets Statement of profit or Income statement and loss and other equity comprehensive income Items of income, expense, gains and losses Other Other disclosures disclosures Accounting policies Hedge accounting Fair value (detailed Fair value disclosures in IFRS 13) Qualitative disclosures Quantitative Quantitative disclosures disclosures Credit risk Exposures to risk Objectives, policies and processes Liquidity risk Market risk Offsetting Collateral Allowance account for credit losses Compound financial instruments with multiple embedded derivatives 18 Defaults and breaches © 2014 Deloitte Touche Tohmatsu Limited IFRS 7 Reclassification If the entity has reclassified a financial asset out of the fair value through profit or loss category or out of the available-for-sale category, it shall disclose: a. the amount reclassified into and out of each category; b. until derecognition, the carrying amounts and fair values of all reclassified FAs; c. if reclassified our of FVTPL; explain the rare situation and the facts and circumstances indicating that the situation was rare; d. the fair value gain or loss in total comprehensive income in that reporting period and in the previous reporting period; until derecognition, the fair value gain or loss that would have been recognised in total comprehensive income if the financial asset had not been reclassified; the effective interest rate and estimated amounts of cash flows the entity expects to recover, as at the date of reclassification of the financial asset. e. f. © 2014 Deloitte Touche Tohmatsu Limited 19 IFRS 7 Offsetting arrangements IFRSIFRS 7 Backbone 7 Classes of Classes Financial financial Instruments and instruments Level ofof and level Disclosures disclosures Nature Nature and and extent extent ofofrisks from risks arising arising from financial instruments instruments financial Significance of financial instruments Significance of financial instruments and level of disclosure Statement of Balance Sheet financial position Categories of financial assets and financial liabilities Financial assets and liabilities at fair value through profit or loss Reclassification Derecognition Transfer of financial assets Statement of profit or Income statement and loss and other equity comprehensive income Items of income, expense, gains and losses Other Other disclosures disclosures Accounting policies Hedge accounting Fair value (detailed Fair value disclosures in IFRS 13) Qualitative disclosures Quantitative Quantitative disclosures disclosures Credit risk Exposures to risk Objectives, policies and processes Liquidity risk Market risk Offsetting Collateral Allowance account for credit losses Compound financial instruments with multiple embedded derivatives 20 Defaults and breaches © 2014 Deloitte Touche Tohmatsu Limited IFRS 7 Offsetting arrangements Information to evaluate the impact of netting arrangements by: a. the gross amounts of those recognised FA and FL b. the amounts that are set off when determining the net amounts presented in the statement of financial position; c. the net amounts presented in the statement of financial position; d. the amounts subject to an enforceable master netting arrangement or similar agreement that are not otherwise included in paragraph 13C(b), including: i. amounts related to recognised financial instruments that do not meet some or all of the offsetting criteria in paragraph 42 of IAS 32; and ii. amounts related to financial collateral (including cash collateral); and e. the net amount after deducting the amounts in (d) from the amounts in (c) above. © 2014 Deloitte Touche Tohmatsu Limited 21 IFRS 7 Collateral IFRSIFRS 7 Backbone 7 Classes of Classes Financial financial Instruments and instruments Level ofof and level Disclosures disclosures Nature Nature and and extent extent ofofrisks from risks arising arising from financial instruments instruments financial Significance of financial instruments Significance of financial instruments and level of disclosure Statement of Balance Sheet financial position Categories of financial assets and financial liabilities Financial assets and liabilities at fair value through profit or loss Reclassification Derecognition Transfer of financial assets Statement of profit or Income statement and loss and other equity comprehensive income Items of income, expense, gains and losses Other Other disclosures disclosures Accounting policies Hedge accounting Fair value (detailed Fair value disclosures in IFRS 13) Qualitative disclosures Quantitative Quantitative disclosures disclosures Credit risk Exposures to risk Objectives, policies and processes Liquidity risk Market risk Offsetting Collateral Allowance account for credit losses Compound financial instruments with multiple embedded derivatives 22 Defaults and breaches © 2014 Deloitte Touche Tohmatsu Limited IFRS 7 Collateral Provider of collateral Disclose: • carrying amount of financial assets it has pledged as collateral • terms and conditions of pledge Holder of collateral Disclose: • FV of collateral held • FV of collateral sold/ repledged & if there is an obligation to return it; and • terms and conditions of use of collateral * where permitted to sell or repledge in absence of default © 2016 Deloitte Touche Tohmatsu Limited 23 IFRS 7 Allowance account IFRSIFRS 7 Backbone 7 Classes of Classes Financial financial Instruments and instruments Level ofof and level Disclosures disclosures Nature Nature and and extent extent ofofrisks from risks arising arising from financial instruments instruments financial Significance of financial instruments Significance of financial instruments and level of disclosure Statement of Balance Sheet financial position Categories of financial assets and financial liabilities Financial assets and liabilities at fair value through profit or loss Reclassification Derecognition Transfer of financial assets Statement of profit or Income statement and loss and other equity comprehensive income Items of income, expense, gains and losses Other Other disclosures disclosures Accounting policies Hedge accounting Fair value (detailed Fair value disclosures in IFRS 13) Qualitative disclosures Quantitative Quantitative disclosures disclosures Credit risk Exposures to risk Objectives, policies and processes Liquidity risk Market risk Offsetting Collateral Allowance account for credit losses Compound financial instruments with multiple embedded derivatives 24 Defaults and breaches © 2014 Deloitte Touche Tohmatsu Limited IFRS 7 Allowance account A reconciliation of the allowance account between opening and closing balances is required: Class A Class B Class C Total Balance at beginning of year X X X XXX Plus: Increases in impairment X X X XXX Less: Reversals of impairments X X X XXX Less: Amounts written off X X X XXX Plus/Less: Forex difference X X X XXX Less: Unwind of discount X X X XXX XX XX XX XXX Balance at end of year © 2016 Deloitte Touche Tohmatsu Limited 25 IFRS 7 Compound instruments IFRSIFRS 7 Backbone 7 Classes of Classes Financial financial Instruments and instruments Level ofof and level Disclosures disclosures Nature Nature and and extent extent ofofrisks from risks arising arising from financial instruments instruments financial Significance of financial instruments Significance of financial instruments and level of disclosure Statement of Balance Sheet financial position Categories of financial assets and financial liabilities Financial assets and liabilities at fair value through profit or loss Reclassification Derecognition Transfer of financial assets Statement of profit or Income statement and loss and other equity comprehensive income Items of income, expense, gains and losses Other Other disclosures disclosures Accounting policies Hedge accounting Fair value (detailed Fair value disclosures in IFRS 13) Qualitative disclosures Quantitative Quantitative disclosures disclosures Credit risk Exposures to risk Objectives, policies and processes Liquidity risk Market risk Offsetting Collateral Allowance account for credit losses Compound financial instruments with multiple embedded derivatives 26 Defaults and breaches © 2014 Deloitte Touche Tohmatsu Limited IFRS 7 Compound instruments If an entity has issued an instrument that contains both a liability and an equity component and the instrument has multiple embedded derivatives whose values are interdependent (such as a callable convertible debt instrument), it shall disclose the existence of those features. © 2014 Deloitte Touche Tohmatsu Limited 27 IFRS 7 Defaults and breaches IFRSIFRS 7 Backbone 7 Classes of Classes Financial financial Instruments and instruments Level ofof and level Disclosures disclosures Nature Nature and and extent extent ofofrisks from risks arising arising from financial instruments instruments financial Significance of financial instruments Significance of financial instruments and level of disclosure Statement of Balance Sheet financial position Categories of financial assets and financial liabilities Financial assets and liabilities at fair value through profit or loss Reclassification Derecognition Transfer of financial assets Statement of profit or Income statement and loss and other equity comprehensive income Items of income, expense, gains and losses Other Other disclosures disclosures Accounting policies Hedge accounting Fair value (detailed Fair value disclosures in IFRS 13) Qualitative disclosures Quantitative Quantitative disclosures disclosures Credit risk Exposures to risk Objectives, policies and processes Liquidity risk Market risk Offsetting Collateral Allowance account for credit losses Compound financial instruments with multiple embedded derivatives 28 Defaults and breaches © 2014 Deloitte Touche Tohmatsu Limited IFRS 7 Defaults and breaches For loans payable: a. details of any defaults b. the carrying amount of the loans payable in default at the end of the reporting period; and c. whether the default was remedied, or the terms of the loans payable were renegotiated, before the financial statements were authorised for issue. © 2014 Deloitte Touche Tohmatsu Limited 29 IFRS 7 Significance of financial performance © 2016 Deloitte Touche Tohmatsu Limited 30 IFRS 7 Significance of financial performance IFRSIFRS 7 Backbone 7 Classes of Classes of Financial financial Instruments instruments and Level level of and of disclosures Disclosures Nature and extent Nature extent risks arising arising from ofofrisks from financial instruments instruments financial Significance of financial instruments Significance of financial instruments and level of disclosure Statement of financial Balance Sheet position Categories of financial assets and financial liabilities Financial assets and liabilities at fair value through profit or loss Reclassification Derecognition Transfer of financial assets Statement of profit or Income statement and loss and other equity comprehensive income Items of income, expense, gains and losses Other Other disclosures disclosures Accounting policies Hedge accounting Fair value (detailed Fair value disclosures in IFRS 13) Qualitative disclosures Qualitative disclosures Quantitative Quantitative disclosures disclosures Credit risk Exposures to risk Objectives, policies and processes Liquidity risk Market risk Offsetting Collateral Allowance account for credit losses Compound financial instruments with multiple embedded derivatives 31 Defaults and breaches © 2014 Deloitte Touche Tohmatsu Limited IFRS 7 Significance of financial performance The following items are to be disclosed in the statement of comprehensive income or the notes: Items of the statement of comprehensive income Net gains and net losses Comments • Required for each category • Split between designated and held for trading • Equity reconciliation for available for sale reserve Total interest income and expenses • Aggregated amount excluding FVTPL instruments • Gross amounts • Calculated using effective interest rate method Fee income and fee expenses • Separately disclose fees from trust or fiduciary activities Interest income on impaired financial assets • Difficult to calculate in practice Impairment losses • Required for each class © 2016 Deloitte Touche Tohmatsu Limited 32 IFRS 7 Other disclosures © 2016 Deloitte Touche Tohmatsu Limited 33 IFRS 7 Other disclosures IFRSIFRS 7 Backbone 7 Classes of Classes of Financial financial Instruments instruments and Level level of and of disclosures Disclosures Nature and extent Nature extent risks arising arising from ofofrisks from financial instruments instruments financial Significance of financial instruments Significance of financial instruments and level of disclosure Statement of financial Balance Sheet position Categories of financial assets and financial liabilities Financial assets and liabilities at fair value through profit or loss Reclassification Derecognition Transfer of financial assets Statement of profit or Income statement and loss and other equity comprehensive income Items of income, expense, gains and losses Other Other disclosures disclosures Accounting policies Hedge accounting Fair value (detailed Fair value disclosures in IFRS 13) Qualitative disclosures Qualitative disclosures Quantitative Quantitative disclosures disclosures Credit risk Exposures to risk Objectives, policies and processes Liquidity risk Market risk Offsetting Collateral Allowance account for credit losses Compound financial instruments with multiple embedded derivatives 34 Defaults and breaches © 2014 Deloitte Touche Tohmatsu Limited IFRS 7 Accounting policies Classification Designated at FVTPL Comments • Nature of FA/FLs designated • Criteria for designating • How satisfied designation criteria in IAS 39 AFS • Criteria for designating as AFS Regular way purchases or sales • Trade date or settlement date Impairment • Objective evidence of impairment thresholds • Criteria for allowance account, write-off, reversals • Loans renegotiated which would otherwise be past due or impaired Determination of net gains and losses • Interest and dividends included/excluded from FV movements © 2014 Deloitte Touche Tohmatsu Limited 35 IFRS 7 Hedging Classification For each type of hedge Comments • The type of hedge • Hedging instrument used • Nature of risk being hedged Cash flow hedge • Period when CF expected to occur • Forecast transaction description • Amount in OCI • Amount recycled from OCI • Ineffectiveness reflected in P/L Fair value hedge • FV gains and losses on hedging instrument and hedged item Net investment hedge • Ineffectiveness reflected in P/L © 2014 Deloitte Touche Tohmatsu Limited 36 IFRS 7 Fair value disclosures Fair value per class disclosures Designated FVTPL Held for Held for trading trading Held to maturity • Carrying amount approximates FV Loans and receivables Available for sale Available for sale Financial liabilities at amortised cost Except when • Derivatives linked to above equity investments • Contract with a discretionary participation feature that cannot be reliably measured Designated at FVTPL HFT Please consider incremental disclosures required by IFRS 13 © 2016 Deloitte Touche Tohmatsu Limited 37 IFRS 7 Fair value disclosures - the fair value hierarchy Fair value disclosures 1 2 Quoted prices (unadjusted) Observable quoted prices (adjusted) 3 Unobservable market data Expanded disclosure: • Categorisation of fair value measurements into a hierarchy • Significant transfers between levels (incl reasons) • Level 3 fair value measurements Reconciliation Total gains or losses (amount & description) Changing inputs © 2016 Deloitte Touche Tohmatsu Limited IFRS 7 Fair value disclosures - disclosure example Fair value disclosures Description Fair value measurement at end of the reporting period using: 31 Dec Level 1 Level 2 Level 3 2011 ZMK ZMK ZMK 100 40 55 5 39 17 20 2 75 30 40 5 214 87 115 12 Financial assets through profit or loss Trading securities Derivatives Available-for-sale financial assets Equity investments Total © 2016 Deloitte Touche Tohmatsu Limited Fair value disclosures - disclosure example (Level 3) Fair value disclosures Opening Balance Total gains or losses in profit or loss in other comprehensive income Purchases Issues Settlements Transfers out of Level 3 Closing Balance Total gains or losses for the period included in profit or loss for assets held at the end of the reporting period Fair value measurement at end of the reporting period using: Financial assets at fair Available for value through profit or sale financial loss assets Total Trading Equity securities Derivatives investments Total ZMK ZMK ZMK ZMK 6 5 4 15 (2) (2) - (4) 1 5 2 (1) (2) 2 (1) 2 5 (1) 5 (1) (2) 12 (1) (1) - (2) © 2016 Deloitte Touche Tohmatsu Limited IFRS 7 Nature and extent of risks © 2016 Deloitte Touche Tohmatsu Limited 41 IFRS 7 Nature and extent of risks IFRSIFRS 7 Backbone 7 Classes of Classes of Financial financial Instruments instruments and Level level of and of disclosures Disclosures Nature and extent Nature extent risks arising arising from ofofrisks from financial instruments instruments financial Significance of financial instruments Significance of financial instruments and level of disclosure Statement of financial Balance Sheet position Categories of financial assets and financial liabilities Financial assets and liabilities at fair value through profit or loss Reclassification Derecognition Transfer of financial assets Statement of profit or Income statement and loss and other equity comprehensive income Items of income, expense, gains and losses Other Other disclosures disclosures Accounting policies Hedge accounting Fair value (detailed Fair value disclosures in IFRS 13) Qualitative disclosures Qualitative disclosures Quantitative Quantitative disclosures disclosures Credit risk Exposures to risk Objectives, policies and processes Liquidity risk Market risk Offsetting Collateral Allowance account for credit losses Compound financial instruments with multiple embedded derivatives 42 Defaults and breaches © 2014 Deloitte Touche Tohmatsu Limited IFRS 7 Quantitative disclosures – credit risk Class A Class B Class C Total 1 Neither past due nor impaired X X X XXX 2 Renegotiated X X X XXX 3 Past due X X X XXX 4 Impaired X X X XXX X X X XXX Reconcile to the statement of financial position © 2016 Deloitte Touche Tohmatsu Limited 43 IFRS 7 Credit risk – renegotiated indicators Class A Class B Class C Total 1 Neither past due nor impaired X X X XXX 2 Renegotiated X X X XXX 3 Past due X X X XXX 4 Impaired X X X XXX X X X XXX © 2016 Deloitte Touche Tohmatsu Limited 44 IFRS 7 Credit risk – past due Class A Class B Class C Total 1 Neither past due nor impaired X X X XXX 2 Renegotiated X X X XXX 3 Past due XX XX XX XXX X X X X X X X X X X X X X X X X X X X XXX X X X XXX ? ? ? Age Analysis: - < 30 days - 31 – 60 days - 61 to 90 days Etc. 4 Impaired Collateral held © 2016 Deloitte Touche Tohmatsu Limited 45 IFRS 7 Credit risk – impaired t Ne am ou Class A Class B Class C Total 1 Neither past due nor impaired X X X XXX 2 Renegotiated X X X XXX 3 Past due X X X XXX 4 Impaired XX XX XX XXX X X X X X X X X X X X XXX ? ? ? nt Impaired asset balance Impairment account Collateral held © 2016 Deloitte Touche Tohmatsu Limited 46 IFRS 7 Other credit risk disclosures Disclosures for collateral and other credit enhancements obtained: • Nature and carrying amount of collateral obtained • When assets are not readily convertible to cash the policies for: – disposing of such assets; or – for using them in its operations Disclosure of collateral and other credit enhancements held as security: • Policies and procedures for valuing, managing collateral • Description • Main types of counterparties to collateral and their creditworthiness • Risk concentrations within collateral Remember – collateral is also a class based disclosure © 2016 Deloitte Touche Tohmatsu Limited 47 IFRS 7 Liquidity risk Liquidity risk: The risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities Disclosure required: • Maturity analysis for non- derivative financial liabilities that shows remaining contractual maturities • Maturity analysis for derivative financial liabilities • Description of how entity manages liquidity risks inherent © 2014 Deloitte Touche Tohmatsu Limited 1 IFRS 7 Liquidity risk Examples Fixed rate instruments – Fixed rate loan – Stepped up interest payments Floating rate instruments - Leases - Prime linked borrowings Derivatives – Interest rate swap – Forward exchange contract Off balance sheet items – Loan commitments © 2016 Deloitte Touche Tohmatsu Limited 49 IFRS 7 Liquidity risk Fixed rate instrument (basic) Company A has a R1 million loan from Bank A. The loan has the following terms: • fixed interest bearing loan @ 15% per annum • interest is calculated cumulatively • the loan is expected to be paid in 5 equal capital instalments Cash flows in respect of the loan are as follows: Period i-rate 0 50 Cash flow Workings R 1 000 000 Cash inflow 1 15% (R 350 000) (1 000 000*15%) + 200 000 2 15% (R 320 000) (800 000*15%) + 200 000 3 15% (R 290 000) (600 000*15%) +200 000 4 15% (R 260 000) (400 000*15%) +200 000 5 15% (R 230 000) (200 000*15%) +200 000 © 2016 Deloitte Touche Tohmatsu Limited IFRS 7 Liquidity risk Fixed rate instrument (basic) Period i-rate Cash flow 0 R 1 000 000 1 15% (R 350 000) 6 -12 months 2 15% (R 320 000) 1 – 2 years 3 15% (R 290 000) 4 15% (R 260 000) 5 15% (R 230 000) ‘000’s < 6m Fixed rate financial liability - 6–12 m (350) 2 – 5 years 2 – 5 years 2 – 5 years 1-2 years (320) est Inter 2–5 years Total (780) (1450) Balance sheet (1 000) Difference (450) © 2016 Deloitte Touche Tohmatsu Limited 51 IFRS 7 Liquidity risk Fixed rate instrument (stepped interest) Company A has a R1 million loan from Bank A. The loan has the following terms: • fixed interest bearing loan @ 15% per annum for the first 2 years • fixed interest bearing loan @ 18.5% per annum for the remaining period • interest is calculated cumulatively • the loan is expected to be paid in 5 equal capital instalments Cash flows in respect of the loan are as follows: Period i-rate 0 52 Cash flow Workings R 1 000 000 Cash inflow 1 15% (R 350 000) (1 000 000*15%) + 200 000 2 15% (R 320 000) (800 000*15%) + 200 000 3 18.5% (R 311 000) (600 000*18.5%) +200 000 4 18.5% (R 274 000) (400 000*18.5%) +200 000 5 18.5% (R 237 000) (200 000*18.5%) +200 000 © 2016 Deloitte Touche Tohmatsu Limited IFRS 7 Liquidity risk Fixed rate instrument (stepped interest) Period i-rate Cash flow 0 R 1 000 000 1 15% (R 350 000) 6 -12 months 2 15% (R 320 000) 1 – 2 years 3 18.5% (R 311 000) 2 – 5 years 4 18.5% (R 274 000) 2 – 5 years 5 18.5% (R 237 000) 2 – 5 years ‘000’s < 6m Fixed rate financial liability - 6–12 m (350) 1-2 years (320) est Inter 2–5 years Total (822) (1492) Balance sheet (1 000) Difference (492) © 2016 Deloitte Touche Tohmatsu Limited 53 IFRS 7 Liquidity risk Floating rate instrument Company A has a R1 million loan from Bank A. The loan has the following terms: • prime linked interest rate • the loan is redeemable in a bullet payment in 5 years time Cash flows in respect of the loan are as follows: Period i-rate 0 54 Cash flow R 1 000 000 Interest calculated using a risk adjusted forward curve Cash inflow 1 5.0% (R 50 000) (1 000 000*5%) 2 5.5% (R 55 000) (1 000 000*5.5%) 3 6.0% (R 60 000) (1 000 000*6%) 4 6.5% (R 65 000) (1 000 000*6.5%) 5 7.0% (R 1 070 000) (1 000 000*7%) © 2016 Deloitte Touche Tohmatsu Limited IFRS 7 Liquidity risk Floating rate instrument Period i-rate* Cash flow 0 R 1 000 000 1 5.0% (R 50 000) 6 -12 months 2 5.5% (R 55 000) 1 – 2 years 3 6.0% (R 60 000) 2 – 5 years 4 6.5% (R 65 000) 2 – 5 years 5 7.0% (R 1 070 000) 2 – 5 years ‘000’s Floating rate liability < 6m - 6–12 m (50) 1-2 years (55) es Inter t 2–5 years Total (1 195) (1 300) Balance sheet (1 000) Difference (300) © 2016 Deloitte Touche Tohmatsu Limited 55 IFRS 7 Liquidity risk Derivatives: Interest rate swap (net settled) Company A has an interest rate swap with the following terms: • nominal value of the loan = R100 million • pays variable interest rate; receives a fixed interest rate of 5.5% • annual cash flows • 5 year maturity Cash flows are calculated as follows: Period Variable rate Fixed rate Difference FV Cash flows 1 790 422 1 5.0% 5.5% (0.5%) (500 000) 2 5.5% 5.5% 0% 3 6.0% 5.5% 0.5% 500 000 4 6.5% 5.5% 1.0% 1 000 000 5 7.0% 5.5% 1.5% 1 500 000 0 © 2016 Deloitte Touche Tohmatsu Limited 56 IFRS 7 Liquidity risk Derivatives: Interest rate swap (net settled) Period i-rate* FV Cash flow 1 790 422 (500 000) 6 -12 months 0 1 – 2 years 1 (0.5%) 2 0% 3 0.5% 4 1.0% 500 000 2 – 5 years 1 000 000 2 – 5 years 5 1.5% 1 500 000 2 – 5 years ‘000’s < 6m Interest rate swap - 6–12 m 1-2 years 500 2–5 years - (3 000) Total (2 500) © 2016 Deloitte Touche Tohmatsu Limited 57 IFRS 7 Liquidity risk Derivatives: Forward exchange contract (gross settled) Company A loans US$10 000 from Bank A – the loan is interest free and repayable in 6 months time. To hedge it’s risk against foreign currency movements, Company A enters into a 6 month FEC at a rate of R7.59:US$. Assume that this transaction happens at year end. The following cash flows are expected to occur in respect of the FEC: Pay R75 900 Receive US$10 000 ‘000’s FEC < 6m - Financial liability Financial asset 6–12 m 1-2 years 75 2–5 years - Total - 75 © 2016 Deloitte Touche Tohmatsu Limited 58 IFRS 7 Liquidity risk Off balance sheet items: Loan commitment Company A has committed to lend Company B an amount of R10 million over a 5 year period, with equal instalments per annum. Company B draws down R2 million per annum. There are no draw downs at balance sheet date Cash flows are as follows: Period Cash flow 0 0 1 (R 2 000 000) 2 (R 2 000 000) 3 (R 2 000 000) 4 (R 2 000 000) 5 (R 2 000 000) © 2016 Deloitte Touche Tohmatsu Limited 59 IFRS 7 Liquidity risk Off balance sheet items: Loan commitment Period Cash flow 0 0 1 (R 2 000 000) 6 -12 months 2 (R 2 000 000) 1 – 2 years (R 2 000 000) 2 – 5 years 3 (R 2 000 000) 2 – 5 years (R 2 000 000) 2 – 5 years 4 5 ‘000’s < 6m Loan commitment - 6–12 m ( 2 000) 1-2 years 2–5 years ( 2 000) f off B.S Inclusion o Total (6 000) (10 000) Balance sheet 0 Difference (10 000) © 2016 Deloitte Touche Tohmatsu Limited 60 IFRS 7 Market risk - definitions Market risk: The risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices Market risk comprises of: • currency risk • interest rate risk • other price risk. Interest rate risk: Arises on interest-bearing financial instruments recognised in the statement of financial position. Currency risk: Arises on financial instruments that are denominated in foreign currency Other price risk: Arises on financial instruments because of changes in commodity prices or equity prices © 2014 Deloitte Touche Tohmatsu Limited 1 IFRS 7 Market risk Market risk sensitivity process Market risk process Step 1 Step 2 Identify risk variable Step 4 Identify exposure at BS date Step 3 Appropriate level of aggregation Reasonable possible change Step 5 Calculate and present sensitivity analysis © 2016 Deloitte Touche Tohmatsu Limited 62 IFRS 7 Market risk Step 1: Identify risk variable Examples of risk variables an entity can be exposed to: Type of risk Interest rate risk Risk variable examples JIBAR LIBOR Prime Other benchmark interest rates Currency risk Foreign currencies Equity price risk Other price risk Commodity price risk Prepayment risk © 2016 Deloitte Touche Tohmatsu Limited 63 Market risk Step 1: Identify risk variable Financial Instrument Nature of risk Market risk type Trade Accounts Receivable / Trade Accounts Payable For receivables/payables denominated in currency other than functional currency exposure to currency movements exists Interest Rate Risk Cash and cash equivalents / Bank overdrafts For cash accounts denominated in currency other than functional currency exposure to currency movements exists Interest Rate Risk Investment in unlisted equities Exposed to chages in equity prices / valuation inputs Equity Risk Derivative instruments e.g FEC’s & Swaps Fair value of derivative instruments subject to foreign exchange or interest rate volatility Foreign exchange rate risk and/or Foreign exchange rate risk Foreign exchange rate risk Interest Rate Risk © 2016 Deloitte Touche Tohmatsu Limited 64 Market risk Step 2: Identify exposures at balance sheet date The table below sets out examples of risk exposures and the components that are affected. Profit and loss Equity Floating rate debt instruments Effective portion of hedging instruments of cash flow and net investment hedges Foreign currency debt instruments Intercompany foreign currency denominated debt instruments that form part of the net investment of a foreign operation All financial instruments at FVTPL Available for sale items Derivatives that are designated FV hedge instruments Fixed rate debt instruments which are FV hedged items Equity investments at FVTPL Equity investments at AFS © 2016 Deloitte Touche Tohmatsu Limited 65 Market risk Step 3: Determine reasonably possible changes to risk variables • Entity needs to determine what a reasonably possible change to the risk variable is • The reasonably possible change should not include “worst case scenarios” • Reasonably possible change should be assessed over the time frame until the entity next presents these disclosures. • Range of reasonably possible changes may be wide: – Disclosure is not required for each change within a range – Sufficient to disclose changes at the limits of the reasonably possible range © 2016 Deloitte Touche Tohmatsu Limited 66 Market risk Step 4:Determine appropriate level of aggregation • Decide how to aggregate the information to display: – May be for financial instruments that are held for trading from those that are not – Alternatively, disclosures may be for each risk • At a minimum, disclose sensitivity analyses for each currency to which the entity has an exposure to. • Entity shall provide sensitivity analyses for the whole business – But may provide different types of sensitivity analyses for different classes of financial instruments. © 2016 Deloitte Touche Tohmatsu Limited 67 Market risk Consider complexities Holding company (H Co.) 100% US$ functional currency A wholly owned subsidiary of H.Co (USD $ functional currency), namely S.Co (€ functional currency) has a USD $ trade receivable of USD $ 50 000. Spot rate at transaction date $/ € was 1.1 Spot rate at reporting date $/ € is 1.4 Subsidiary company (S Co.) € functional currency Trade receivable (US$) © 2016 Deloitte Touche Tohmatsu Limited 68 Market risk Consider complexities Spot rate at reporting date: Spot rate at reporting date: $/ € = 1.4 $/ € = 1.6 Restatement of loan in S.Co at reporting date: Restatement of loan in S.Co at reporting date: Dr Trade Receivable 15k Dr Trade Receivable 25k Cr Forex gain 15k Thus 15 000 profit will be consolidated into H.Co Group results Cr Forex gain 25k Thus 25 000 profit will be consolidated into H.Co Group results Reflects sensitivity to currency movements © 2016 Deloitte Touche Tohmatsu Limited 69 Market risk Step 5: Calculate and present the sensitivity analyses Entity shall disclose the effect on profit and loss and equity for exposures at the balance sheet date assuming reasonably possible changes have been applied to them. © 2016 Deloitte Touche Tohmatsu Limited 70 Market risk Illustrative example Entity A has the following exposures at Y0: Exposure ZAR ZAR prime linked borrowings 350 ZAR denominated listed share – classified as available for sale 500 USD denominated fixed rate borrowing at amortised cost 730 (USD 100) Entity A expects the following reasonably possible changes: Risk variable Expected change Prime rate 150 basis points ZAR equity prices 8% ZAR/USD exchange rate 15% © 2016 Deloitte Touche Tohmatsu Limited 71 Market risk Illustrative example The market sensitivity analysis may be calculated and presented as follows: Risk variable Workings Profit and loss Prime rate 350*1.5% +/-5.3 ZAR equity prices 500*8% ZAR/USD exchange rate 730*15% Equity +/-40 +/-109.5 Should be disclosed AFTER tax effect © 2016 Deloitte Touche Tohmatsu Limited 72 Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. 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